Basic Economic Theory Moment

The Federal Reserve is a corporation.

The Federal Reserve raised the interest rate another quarter percent
Wednesday, 7/25/23. Who is the Fed that is making credit cards, housing
mortgages, car loans, and many other things more expensive? The Fed is not part of the Executive Branch of the government. Instead, it is a quasi-public corporation with stockholders. Quasi means, unlike a public corporation, the owners do not elect the management board. The following explains the Fed from Ask Fact Check, Brooks Jackson, March 2008.

“The twelve regional Federal Reserve Banks, which Congress established as the operating arms of the nation’s central banking system, are organized much like private corporations– possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock differs from owning private company stock. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year. About 38 percent of the nation’s more than 8,000 banks are members of the System and thus own the Fed banks. The rest are affiliate members or keep their money in a member bank and are thus controlled by the Fed.

But the banks don’t necessarily run the show. Nationally, the Federal Reserve System is led by a Board of Governors whose seven members are appointed by the President and confirmed by the Senate. They have fourteen-year, staggered terms. Only one seat comes up for election every two years. No president can appoint more than three to ensure political control, and members serve across several administrations.

The private banks also have a voice in regulating the nation’s money supply and setting targets for short-term interest rates, but it’s a minority voice. The Federal Open Market Committee makes those decisions, with a dozen voting members, only five of whom come from
the banks. The remaining seven, a voting majority, are the Fed’s Board of Governors who, as mentioned, are appointed by the President, and confirmed by the Senate.

The Chairman of the Board of Governors is appointed by the President of the United States and confirmed by the Senate. Chairman Powell’s term is four years, and he was reelected to a second term.
The Board members are independent and meant to look after the whole economy, not a particular political person or party.
Trump attempted to appoint several unqualified persons to the Fed Board, and the Senate rejected them. One of the best-known was Judy Shelton.”

She acknowledged some of her views are well outside the economic
mainstream, especially her support for the gold standard. Tying the
dollar to physical gold is a relic of the last century and would sharply
limit the amount of money in circulation (Herbert Hoover learned that
lesson the hard way). Shelton also questioned the very mission of the
central bank – to promote maximum employment, along with stable
prices.

The next moment will show the Fed uses banks to impact your
economic behavior. Moment #5 is titled, How Banks Work and make
money.

That’s five hundred and fifty-two words.